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Mortgage Rate Rise – Who Would Be A Governor?

27th January 2014

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It must be difficult to be a Governor sometimes. No sooner have you set what you think is a pretty safe target as a potential trigger for interest rate movements; one you don’t actually think will be hit for a year or so at least; than said target is almost breached within months.

Of course this is actually good news, but unemployment falling by the biggest quarterly fall for 17 years to now stand at 7.1% has opened up a can of worms.

Although the Bank of England quickly came out and denied that they were planning to increase rates any time soon, abandoning the “trigger” concept pretty quickly, it does leave several uncomfortable questions.

Firstly, how can the Banks forecasters be so wrong in their assessment of the economy? This is the nature of economics though, always an art rather than a science as every start of year predictor knows. At least, as Mr Carney says, “If our forecast is going to be wrong, it’s better to be wrong in that direction”.

The more important question is “what do the markets believe”?

If they ignore the whole Forward Guidance concept then Swap rates will no doubt continue to increase anyway and initial reactions look as if they did just that, with an initial spike in Sterling.

On the back of these recent Swap rate increases some lenders have already begun to put up the cost of 5 year fixed rates accordingly.

The issue for consumers is who to believe and that is where careful advice is most needed. Many of us have been saying for a while that the 5 year fixed market is where the real “value” is as it is unlikely that products will get any cheaper. After this set of statistics, no matter what the Governor’s protestations are, this looks even more evident.

There are of course other considerations, especially when talking about a recovery that has twisted and turned more times than a John Le Carre novel. Apart from questions over the timing and pace of any changes, there now seems to be an increasing amount of chatter about a forced interest rate rise this year.

Although most analysts still think they will hold out until 2015, the pressure is growing and analysts such as the Centre for Economics & Business Research (CEBR), Citibank & Nomura believe variously that we could see the first rise in August, rising to 1% by the end of the year.

Whether it happens or not, the market expectation of sooner than initially projected rate rises will see the cost of longer term fixed rates no doubt rise further.

On the flip side, however, there seem to be more economists talking about the dangers of deflation now, which in itself could keep rates low.

All this adds to the pot of confusion and increasing clamour for independent advice that is seeing brokers receiving high levels of enquiries.

As far as those looking for mortgage finance are concerned, we have said it before and we will say it again, for those borrowers who would like a little security but have so far held off, locking in to a rate now may prove to be a very wise move.

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Andrew Montlake

About Monty

Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.